Bitcoin interests me as an obvious example of a technological jewel tossed around aimlessly by the brutal hands of cave men. I can’t help but picture a flashlight or a radio set, left behind in the wilderness by geologists, to be picked up later by some Stone Age aboriginals; to be fought over and worshiped. Until the batteries run out. But the batteries have not yet run out! The flashlight shines, the radio plays. Let’s listen and hear what it plays. We can always go back to sharpening our flints and skinning bears later! But if you aren’t the least bit curious about Bitcoin and your bear is going stale, you can safely skip this post.

Bitcoin-related scams and swindles of every kind are so numerous (and monotonous in their predictability) that I will not further waste my readers’ time describing them. They are discussed in excruciating detail elsewhere. So, let’s talk about something different for a change: a nontrivial Bitcoin-based business, beyond mere retail; and one which, at present, works exactly as described on the box.

A reader from Romania, one Mircea Popescu, asked me to try out his MPEx, a stock and futures exchange working entirely in Bitcoin. He presented me with a free account [1] containing one bitcoin, operational from Dec. 21, 2012 to Feb. 5, 2013. Mr. Popescu’s creation is remarkable in a number of ways. He eschews the complexity and creeping featurism of “Web 2.0″ in favor of a simple back-and-forth messaging protocol secured by traditional PGP. A trivial script turns this into a self-explanatory command line tool. I am told that third-party graphical front-ends also exist.

The simplicity of MPEx’s front-end allowed its author to focus things that actually matter. For instance, security. The latter being “cheap and angry,” like a Kalashnikov rifle: bitcoins and other cryptographic valuables are kept on a machine electrically-separate from the automated exchange, and all operations involving incoming or outgoing coins are handled by human hands. This is practical primarily because MPEx is specifically not designed for casual users. Rather, its intended clientele consists of serious traders, of the kind only a notch or two poorer than those who might purchase a seat in the New York Stock Exchange. The intended use cases of MPEx’s Bitcoin gateway are: to deposit one’s starting capital (plus Popescu’s 30 BTC account creation fee [2]) and to withdraw one’s earnings infrequently and in large parcels. For this, sneakernet easily suffices.

The 30 BTC fee is perhaps the most controversial aspect of MPEx. Just about every online discussion of the service ends up being exclusively about the thirty coins. The masses are indignant. They want Free Stuff! Many go so far as to request an MPEx account without sending any bitcoins whatsoever with their request, as some kind of bizarre protest. (Why not try this at a filling station or a jewelry store?) Evidently, because this is the Internet, the true motherland of Free Stuff.

Of course, idiots clamoring for their God-Given Right to Free Stuff is nothing new. It is an age-old plague in the software industry, where the widespread availability of genuinely high-quality products at little or no cost has distorted nearly everybody’s expectations. Anyone asking for money in exchange for a software product or service – especially serious money – risks being seen as at least vaguely unsavory. This is not entirely unreasonable, considering many computer users’ experiences with “enterprise software” and other digital swindles. Of course, plenty of people are willing to oblige the Free Stuff crowd. Some of them give away well-engineered software, in the ancient spirit of scientific collaboration. Others happily peddle questionable “freebies” to chumps:

“Anyone who plans to waste the shareholders’ money can undercut the competition. The easiest thing in the world is to charge too little, it is just as easy as spending too much of other people’s money. Customers will flock to those who do because they are giving away some, if not all, of the value for free. Somebody may even pick up the underpriced goods and sell them at a profit when the stupid company ceases to exist or raises prices to try to survive after all. People of very limited intellect just _love_ “free” stuff. That is how they can be lured into bad and costly deals with free offers, miniscule chances to win some “prize”, and other marketing techniques aimed at the non-thinking. And then there are the cynics, who do not understand that by only taking the free stuff and not buying anything else, they are making everybody else lose, so that free stuff is no longer goodwill to honest people, but reduced to free crap for the fools. When something _must_ be widespread in order to be used, the only option may well be to give it away to lots of people until you have enough market share that those who want on the bandwagon later will be willing to pay for it, but then you need to be damn certain that you are able to keep your customers and not provide free marketing for your competitors, who do not need to recover those marketing costs. Fax machines, cellular phones, even operating systems, have been sold with this technique. Many other products have failed to gain the required market share and have lost all the shareholders’ money. Remember all the web sites that used this trick to cause people to use them, but who were left behind when the _next_ outlet for free goods and services sprung up to waste new money.”Erik Naggum: comp.lang.lisp. Thu, 17 May 2001. (Emphasis mine.)

Popescu is quite uninterested in pushing freebies. He has something entirely different in mind:

“The MPEx registration fee has been in my estimation very successful at selecting high quality, competent and intelligent investors, the sort of which a company benefits from. Consequently it will never be either reduced or waived. While currently it is at a level which I judge adequate, it may be the case in the future that further increases will be warranted. In general it is reasonable to expect that by the time MPEx exceeds in size NYSE, the cost of a seat at the table will also exceed the NYSE.”

MPEx’s long-term business model consists of charging a 0.2 percent commission on sales. (And possibly other income sources [3].) However, the company’s January 2013 financial report shows a net profit of 321.60848092 BTC deriving from the sales commission, and 980 BTC from new account registrations. So, if the figures are to be believed (and neither I nor the angry critics know of any specific reason to doubt them) MPEx is doing a brisk trading business – but at the moment, it derives a hefty share of its income from the sale of new accounts.

The MPEx team consists of what one might call “true believers” in Bitcoin. They are willing to take certain risks – and forgo some of the advantages of dealing in traditional currencies – in order to advance the general state-of-the-art of decentralizedcryptocurrency. (Being involved in Bitcoin “high finance” today is more or less guaranteed to cement one’s reputation as a scammer, even if one is entirely honest.) Popescu’s official position is that a high cost of entry keeps out the idiot rabble. Not everyone (and certainly not the rabble) understands why this might be a good idea.

My view of stock and futures trading (by no means an expert view!) is that there are two basic ways to profit:

To move money from “stupid” pockets into “smart” ones, the way professional poker players do. One exploits information asymmetries, flowing from a better understanding of the market (or a knowledge of secrets.)

To invest directly in the physical world. When you purchase aluminum futures from a broker, you stand to profit if a new deposit of bauxite were to be discovered. And so forth.

When I wrote to Popescu to ask why he prefers to keep the “stupid pockets” away from MPEx, he explained that the misbehavior of casual, uninformed, lazy, or simply unintelligent investors is liable to frighten off businesses who might otherwise consider listing their stocks on the exchange. [4] Thus he chose to forgo the opportunity to harvest the pocket change of poor fools (wealthy fools are presumably welcome at MPEx.)

MPEx is a product intended for financial professionals. The very concept of a professional product is steadily being lost in the noise of modernity. Like most civilized people, I am a satisfied user of countless mass-market products. However, I also recognize that certain products and services by their very nature do not benefit from mass-marketability. Erik Naggum explains it better than I ever could:

“in _every_ field I know, the difference between the professional and the mass market is so large that Joe Blow wouldn’t believe the two could coexist. more often than not, you can’t even get the professional quality unless you sign a major agreement with the vendor — such is the investment on both sides of the table. the commitment for over-the-counter sales to some anonymous customer is _negligible_. consumers are protected by laws because of this, while professionals are protected by signed agreements they are expected to understand.”Erik Naggum, comp.lang.lisp. Feb. 16, 1997.

“You can find a job at a hamburger joint without any skills whatsoever, but if you want to look at how you produce equipment used in hamburger joints that should be simple enough that any unskilled person can operate it without causing himself damage or produce bad food, you look at the end of the market that Common Lisp is good at helping — you don’t see many ads for hamburger joint equipment designers, either.”Erik Naggum: comp.lang.lisp. May 1 1999.

What exactly did I do with my demo account on MPEx? I am afraid the answer is rather boring. Given that a single bitcoin is rather short of what one might need as collateral funds in futures trading, I focused solely on stocks. That is to say, I picked the two best-performing stocks on MPEx and bought a small quantity of each. These were, unsurprisingly: MPOE (MPEx’s own stock) and DICE (Satoshi Dice, a kind of casino. [5]) In the end, I ended up with ~1.4 BTC. [6] Popescu’s service works exactly as described. ”Buy” and “Sell” requests are processed in a timely manner (albeit with some curious random delay intended to thwart “high frequency” traders. [7]) So what is there to complain about? At the moment, most of the complaints appear to come from envious idiots, whose semi-literate whining is of little consequence. But there are a few problems of some concern to the intelligent reader.

MPEx, seen from a distance, is a pretty good machine for converting ten thousand dollars into twenty thousand. [8] But, given the registration cost, it is profoundly useless as a machine for converting ten dollars into twenty. And most of the idiot critics are angered precisely by its failure to be the latter machine. Unlike the Reddit crowd, I have no ideological problem with the fee. I understand that an MPEx account is only a sensible purchase for those who intend to invest the equivalent of tens of thousands of U.S. dollars in the Bitcoin economy, and are willing to trust Popescu with such sums. As I do not presently fall into either category, I will not be shelling out for a permanent account on MPEx.

Contrary to popular opinion, machines which “convert a million dollars into two million” do in fact exist, but by their very nature they can be accessible only to a few (what some call the rentier class.) Only a handful of people can live off dividends, doing whatever they please. The rest of us must provide them with food, clothing, software, and so forth. But MPEx is not such a machine. It is merely a machine for converting ten thousand dollars into twenty. Thus, it requires a modicum of intelligence (and a good bit of luck) to operate correctly. Much of the anger directed at Popescu by the peanut gallery is arguably misdirected. Its intended targets are almost certainly the owners of the machines of the former kind: oil wells, banks, etc. (Which also require intelligence to operate, but said intelligence is normally purchased by the dividend-drawer.) [9] MPEx is “guilty by association” because it too appears, at first glance, to be an apparatus which generates wealth by virtue of being well-placed (access to brokers) and well-advertised. In reality, MPEx is more like a fleet of trucks or a sawmill. It will in fact generate wealth, but it is an instrument which requires a good measure of talent to operate (talent which is difficult to simply rent without losing a large share of the rewards, because it is rare enough to name its own price.)

Yes, it was once the case that you had to be a financier to send an intact penny across the ocean. But the fact that Bitcoin enables you to do so does not turn you into a financier. Nobody cancelled “money makes money.” It would be rather like demanding that an asteroid should have the gravitational pull of Earth. The Third Rock From The Sun can hold an atmosphere and your piece of cosmic flotsam can’t. Such is life. Quantity still has “a quality all its own.” Ten million dollars buys you a money printer, but ten dollars do not. Not even a proportionately-smaller one. Everyone who hopes to see some kind of democratizing influence in Bitcoin is gravely misguided: by some indications, the Bitcoin ecosystem is at least as “top heavy” as the world of meatspace finance.

And then there are those who see the success of MPEx as clear evidence of fraud. Once you get past the fools who hate success per se (especially success earned without literal sweat or obvious physical risk), what valid criticisms remain? Turns out, there’s plenty to think about.

MPEx presently derives two-thirds of its profit from registration fees. And its own stock is among the best-performing. Does this, by itself, make it a scam? I do not think so. There is nothing devious about operating a bubble, so long as the participants are made to understand exactly what they have become involved in. In fact, in some countries, traditional pyramid schemes are legal, so long as they advertise themselves as such. Do Popescu’s clients understand their place in life? Given their level of investment, I should like to think so. The Popescu bubble is not my problem, and it won’t become your problem unless you choose to make it so.

My problem with MPEx lies elsewhere, and serious students of Bitcoin would do well to give it some thought. MPEx is an example of just the kind of thing I spoke of when I wrote that Bitcoin is a microscope being used as a hammer. Bitcoin is an elegant jewel of mathematical engineering because, for the first time in the entire history of money, it makes it possible to conduct commerce without trusting anyone. Or, more precisely, without trusting any particular person or small group of people. It is even possible to construct a stock or futures exchange in this manner. Or a universal reputation-tracking system. One must simply build on top of the mathematical foundation of Bitcoin, creating a fully-decentralized system secured by strong cryptography – rather than a conventional organization made up of fallible human beings. The problems of interfacing such a system with the world of physical commerce and fiat currencies are genuinely hard – but notunsolvable.

Is Popescu interested in converting MPEx into a peer-to-peer system which does not require you to trust a Romanian businessman – and could not be shut down by a well-placed lawsuit or bullet? Yes and no. Let’s ask him:

“In its current incarnation MPEx is a centralised system. This is not happenstance, all markets are by their very nature centralised affairs and financial markets especially, as trust is the only required ingredient to their continued operation. Decentralisation will occur, if and only if the environment makes it impossible for MPEx to be operated as is, but it will probably not exactly take the form of a blockchain-based system for reasons already discussed.”

In case the domain is confiscated or otherwise lost MPEx will move to a different domain, in a different jurisdiction. Should the same happen again, MPEx would move to what will at the time be a solid alternative for a free Internet, be it the TOR network, namecoin or some equivalent DNS or any comparable solution. No government will ever be able to stop the Internet, in general. We’re prepared to show this in the particular. Should the systems be confiscated or otherwise lost the service will failover to different systems, possibly on bulletproof hosting if need be. If sufficient pressure is put on this side MPEx will be recoded as a p2p system.

I admire the man’s optimism, but to me it reads a bit like: in the event of MPEx being thrown off the roof of a skyscraper, we intend to invent the parachute on the way down. I understand Popescu’s reluctance to discuss details of MPEx’s contingency plans within earshot of the enemy, I really do. But the tight lips and inexplicable bravado ought to raise some eyebrows.

I do not, at present, believe that Mircea Popescu is a dishonest man. His creation operates more-or-less exactly as described, and he takes great pains to ensure that everyone who decides to trust him with money understands what he is getting into. Yes, there are a great many off-putting aspects to MPEx. Its home, Romania: the land of countless spammers who have never seen the inside of a jail; the fact that its relationship with traditional meatspace commerce and law is quite murky (Is MPOE incorporated? Where? What are its liabilities? Has anyone won legal redress from it for any perceived wrong, in a traditional court?) But none of these things are secrets. Although certain features of Popescu’s behavior are rather worrisome. I am not, of course, referring to his disdain for idiots. (I enthusiastically share in it.) Instead I mean things like this:

“Legally MPEx will continue to promote the correct view of BTC, as a game currency not in any significant way different from any other game currency. This stance can not be changed through Internet chatter, mass delusion no matter how widespread or court rulings, whatever jurisdiction they may be issued in. Specific legislation alone may change things, and we will certainly lobby against such nonsensical legislation should it come under consideration anywhere. I would imagine we’d not be in any way alone.”Mircea Popescu, Feb. 3, 2013: “So, What’s the Plan with MPOE/MPEX?”

So, either BTC is a “game currency” and MPEx is a toy (and children ought to be able to purchase time on it with their lunch money) or BTC is serious adult business, fit to displace the New York Stock Exchange when its hour comes. Which is it? I understand that the above is intended to keep the hordes of predatory lawyers and bureaucrats at bay. Unfortunately, governments bent on confiscating wealth (and, more importantly, retaining control over the basic mechanisms of commerce) are seldom stopped by one man’s Talmudic arguments, no matter how clever. When American bureaucrats finally decide that Bitcoin is a threat to their hegemony, cryptocurrencies might continue to exist. But will MPEx? At times, it seems to me that Popescu has declared war on traditional meatspace institutions: banks, stock exchanges, courts. What are the rules of this war? What other aspects of mainstream society is Popescu at war with? This kind of thinking is not by itself damning, but these are questions which I would like to see some clear answers to before I give a man serious money.

Popescu insists that his contigency plan will allow MPEx to operate regardless of what any government might do. It will, he insists, carry on as a massively distributed peer-to-peer system. What interest might Popescu have in a fully-decentralized Bitcoin stock exchange? Well, presumably he will own it, and reap the profits. But I confess that I am rather unclear on the concept of how a genuinely peer-to-peer system could have an owner. Ah, but it must have an owner. Popescu and his friends have to eat, after all. Well, in that case it is not peer-to-peer. Anything with an identifiable meatspace owner can be destroyed by a bureaucrat in the blink of an eye. If MPEx were owned and operated by the ruler of North Korea – or some other organization which might stand a chance against a modern army and a real blockade – I might be willing to believe that it could weather the wrath of the U.S. financial overlords. Otherwise it looks like a bit of a long shot, to put it mildly.

In conclusion, I would like to reproduce one unusually-insightful comment from the peanut gallery.

“he should not be trusted. here’s why: a person with his attitude, believing that idiots should die, may not be a scammer today but could easily be one tomorrow. just like that. because a scammer is essentially exploiting “idiots” (by his own definition at least) and he can easily rationalize his actions (at least to himself) and even think he’s doing humanity a service. so by extension you would automatically be an idiot if you trusted him.”(http://www.reddit.com/r/Bitcoin/comments/17zq8j/because_most_people_are_idiots_in_spite_of_never/c8abuqh)

I disagree that Mircea Popescu’s attitude towards actual idiots shows him to be untrustworthy. But, like many entrepreneurs, he fails to understand that trust involves an element of irrationality. Most people come to trust a merchant not merely through an understanding that honest dealing is to his continued advantage, nor solely through the threat of physical punishment dealt out by governments. They build trust as an emotional connection.

Popescu patiently explains that bamboozling his clients would not be in his best financial interests. This is well and good, but it can be turned around, and one could reasonably ask whether he will betray, should it ever be in his best interest to do so. Among technologists, a disdain for “human” emotional mishmash is almost a universal. Yet it remains a character flaw. By rejecting the seemingly-irrelevant world of human trust-building (beyond strict adherence to promises) one asks to be thought of as a mechanism. That is, to be reasoned about game-theoretically. And reasonable people will sit around and try to predict exactly when and in what manner you, the master of reasoned thought, will betray them. To his credit, Popescu appears to be making this tradeoff consciously. The disdain of Internet chatterers neither picks his pockets nor breaks his bones. But at some point, when the MPOE gravy train comes to a halt, MPEx might find it necessary to stop ignoring these aspects of public relations. [10]

At present, Mr. Popescu is genuinely and truly loaded, and does not need my (or anyone else’s) advice on how to do business. Right now there is a never-ending supply of people eager to purchase shovels in his gold mine without asking too many questions. But should this gold rush end, the crowd of wealthy risk-takers who ask few questions might give way to a considerably smaller crowd of somewhat poorer ones, who do ask questions. Should this come to pass, Popescu may need to rethink some of his choices (or retire to writing books. I’m quite in favor of that.)

If you have a hundred thousand dollars stashed between your sofa cushions, by all means invest it in stocks and futures on MPEx. But make sure they aren’t the last hundred thousand in your sofa, as you may well lose them. Contrary to Popescu’s claims, if American bureaucrats should decide to give MPEx the “full WikiLeaks treatment,” he will run into nontrivial problems – not necessarily limited to legal ones. I, for one, will wait for the fully-decentralized systems. [11]

Once again, Mircea Popescu could very well be an exceptionally-honest man. I, for one, have little reason to think otherwise. He might even have the moral integrity given to few, and will one day stoically face the firing squad, taking his PGP private key passwords to the grave to protect his clients. Such men do exist. But I would like to point out the obvious yet important fact that MPEx relies heavily on the future honesty of a small handful of people. We take this for granted in our meatspace dealings, as “the cost of doing business.” Yet there is no reason for Bitcoin users to make permanent peace with this constraint. Bitcoin makes trust-free systems thinkable, if not immediately practical. And they are a worthy goal, because the world has a way of turning honest men into, well, other kinds. With money, or with firing squads.

Edit: Popescu’s reply.
[1] MPEx communicates almost exclusively through Mircea Popescu’s personal secretary. A bit of an oddity for an operation consisting of a handful of people.

[2] ~630 USD, at the time of this writing.

[3] It is possible that Popescu, being a clever fellow, invests the bitcoins he holds in trust in some conservative way.

[4] Private communication.

[5] Satoshi Dice is a can of worms which almost deserves its own discussion. It is, at its core, a simple “numbers game.” That is to say, an industrial-strength harvester of chump money, precisely the kind of thing which Popescu expresses his disdain for at every opportunity. But listing its stock on MPEx does not bother him, because there are sufficiently many layers of isolation between him and the chumps. The cost of running Satoshi Dice is approximately zero. So, it is essentially a pyramid, where a group of people owns stock (yielding hefty dividends, while the fun lasts) and taking every effort to drum up its value by selling shares. Whether you see this as an outrage or business-as-usual depends on your upbringing.

[6] I transferred this sum to a personal address to test MPEx’s withdrawal mechanism. But if Popescu would like the 1.4 BTC back, he (not his secretary or other minion) is welcome to leave a comment here to this effect, signed with his public key. I will happily return his pocket change.

[7] My understanding is that MPEx reserves the right to operate profitable “trading bots” entirely for itself.

[8] If you buy its own stock, and while the latter continues to be in demand. Naturally.

[9] This is not a political blog, so I will not bother explaining what I consider to be obvious aspects of how modern industrial societies are put together.

[10] As I gather, the MPEx PR department currently consists of one person, paid to post pictures of pretty girls in Bitcoin forums.

[11] And for the fully-decentralized Bitcoin-to-fiat exchanges. Why should I fax my passport to a stranger in Japan?

Thanks for this, I found it both fascinating and well written; though I hadn’t heard of MPEx before.

I might add that while it doesn’t bother me, in my experience there are many who would take offence to your level of ‘idiot bashing’. It seems that questioning someone’s cognitive performance has become politically incorrect.

I was given the same opportunity to review it, presumably for the same reason you were (i.e. none of us are fond of idiots). I agree with you that the registration fee issue is probably NBD; seats on the exchange cost money. However, I should be able to sell my seat on MPEX, if it is a seat. If it’s a fee… $3000 (or $6000 or whatever BTC is “worth” these days) for the privilege of trading is silly in this day and age. IB gives me DMA for free, pays me to provide liquidity, and is a legitimate broker trading on legitimate exchanges with legal remedy.

I do consider it fairly shady that his stock is listed there. While the NYSE also lists NYSE, it would look a little different if a new exchange started up, with the exchange making up a significant fraction of the market cap and volume. An exchange where the exchange is traded … and the guy who runs the exchange owns some huge fraction of the issued stocks: that’s inherently fraudulent bullshit. The NYSE was a partnership of traders until … what? 2005? Successful and legitimate new exchanges will probably follow this pattern.

Trust: the dude offered me money to review his website. That’s not so good. It’s hosted in Romania, and took a long time to spend $10 so: also not good. He spends a lot of time in drag trolling forums: erm, I guess I was a student once too. Doesn’t inspire confidence. Neither does writing the code in PHP, or running a pr0n chatboard on his consulting website.

Ultimately, exchanges are not entirely based on trust: they’re based on clear rules and legal remedy in the event of fraud. While this involves “trust” in the regulating authorities, thus far that trust has been fairly well placed. There is no such thing on MPEX. It’s not even clear how the crossing works. I won’t trade a FOREX broker who has “first look,” and no sane person will trade an exchange without published exchange rules. Not that the other two or three are any better: the one in Russia explicitly reserves the right to alter exchange fees at any time.

Wholly misleading point: It is merely a machine for converting ten thousand dollars into twenty. It it not a machine that doubles one’s money. That is complete nonsense. It’s a machine to buy and sell stocks. Good lord…